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FAREED ZAKARIA, HOST: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

The talk of the week, at least in certain circles in Washington, New York and London, has been that Barack Obama is failing in his role as leader of the free world. The British columnist, Jonathan Freedland, writing in "The Guardian," says that Obama looks neither like JFK nor FDR, but rather JEC -- that's James Earl Carter.

Ouch.

Obama has encountered a Europe that is more resistant to his charm, or at least to his policy proposals. The French and Germans have their own proposals. The Chinese and Russians have come out with their own demands. And everyone expects him to apologize for having caused this mess in the first place.

But, of course, Obama didn't cause this mess, and nobody really wants to blame him personally. The problems Barack Obama is facing on the world stage have nothing to do with him. They are really a sign that personality cannot trump power in the world of realpolitik.

The real story here is that power is shifting away from American dominance to a post-American world. Yes, that was the argument of the book I wrote last year, but the evidence for this just keeps piling up.

The Chinese have called for a new reserve currency to replace the dollar. This would never have happened 10 years ago. Back then, they needed America too much to dare to say things like this. The French and Germans want a new system of financial regulation that will replace American-style capitalism that has reigned for the last 20 years.

They're all flexing their muscles now, because they can. So, welcome to the post-American world.

On the show today, I asked myself, who could talk about the myriad challenges facing the world, and in particular, President Obama -- economic crises, domestic politics, international diplomacy. How about a man who has been chief of staff at the White House, secretary of state, secretary of the Treasury and run two presidential campaigns to boot?

ZAKARIA: And now, James Baker joins me from the Baker Institute for Public Policy at Rice University in Houston.

Welcome, Secretary Baker.

JAMES BAKER, FORMER U.S. SECRETARY OF STATE: Thank you, Fareed. It's a pleasure to be with you.

ZAKARIA: President Obama faces a unique set of challenges, a unique set of problems.

What is your basic sense? How is he doing?

There has been some criticism and controversy of feeling that he's facing greater hostility and challenges than perhaps people had expected, given his charisma.

BAKER: I think that dealing with the economic crisis facing the nation is the number one priority. That ought to be his number one priority, his number two priority and his number three priority.

Health care is something that's going to take a long time. You can bring that up later on. Climate change is something that's going to be very controversial and going to take a while to do.

I mean, there's just a lot of things coming -- a lot of proposals coming out. And I just think that focusing a bit more on the economic problem now.

He would probably argue, "Look. I'm doing everything I can on the economic problem." And I'm sure they're focusing on that. But they are still, nevertheless, coming out with a lot of other proposals.

And I think we saw -- there was, in connection with the Carter presidency in the early days of it, they didn't seem to prioritize quite to the degree and extent that they should have.

Every president, you know, gets 100 days' honeymoon. This one may -- he came in with such approval and won such a big victory, he may get a little more than that, but he's not going to get a lot more than that. So, you need to take on the biggest challenges in those first 100 to 120 to 150 days.

ZAKARIA: But you have in the G-20 now the Germans and the French saying they want to press for international financial regulation. You have Britain and the United States trying to focus more on the stimulus issue. The Chinese have been talking about a reserve currency other than the dollar. He's getting a lot of pushback. How should he handle that in, you know, in places like the G-20?

BAKER: Well, I think he's handling it very well. He's saying, forget this talk about another reserve currency. That's really impractical. It isn't going to happen. It's not going to happen in your lifetime, and it's not going to happen in mine. We can talk about why later on.

With respect to stimulus, those countries -- they're taking the position, look, we've stimulated all we need to, and we're not going to do anymore.

But there is going to be a meeting of the minds, I think, on some additional regulation -- not a global regulator. We're not going to -- the United States of America should never agree to have an international regulator that tells it what to do and what not to do with its economy.

But there are some things, I think, that it looks now like are going to come out of this meeting. Some sort of regulation of tax havens, that's a healthy thing. That would be a healthy thing globally. Some regulation perhaps of hedge funds, and things like that.

And so, I think we'll probably see that. And I think the Obama administration will be going along with that.

ZAKARIA: What about the core financial issue, which is, what to do about these banks.

You wrote an op-ed in the "Financial Times," in which you basically remembered the experience of Japan's "lost decade," when you were in high government office. And you pointed out that the key problem was, they didn't deal with the bad banks fast enough and decisively enough.

They kept these sort of zombie banks alive...

BAKER: Right.

ZAKARIA: ... you know, well enough not to die, but not well enough to actually give loans.

Now, it does seem like there may be some similarity here, in that we are not dealing quickly enough, fast enough. And should we, as many people have said, effectively take over some of these bad banks and write those bad assets off their books?

BAKER: Well, you only do that -- you would only do that for the minimum amount of time required in order to sell them back to the private sector and get them back into the private sector.

But what I said was, we ought to classify these banks as healthy, hopeless and needy. The healthy, you don't have to do anything with. The hopeless you really should close. And the needy, you need to infuse some government money in there and require that the management and the stockholders and some of the bondholders take a haircut, or a loss. Or you get rid of the management, you wipe out the stockholders and you give the bondholders a haircut. And you clean up the banks' balance sheets, and then you immediately -- as quickly as you can, you sell them back to the private sector.

It's not a nationalization. Or you can argue that it's a temporary nationalization.

Now, Secretary Geithner has called for stress tests, for stress testing these banks. And that's a good thing to do, provided those are really rigorous stress tests. The worst thing in the world would be to have a phony stress test and say, "well, they look OK," and let them continue on as zombie banks.

We should not repeat Japan's mistake. We really cajoled the Japanese back in those days to let their banks -- clean out their banks and move forward. They didn't do it, and they suffered 10 lost years.

ZAKARIA: Bottom line, how do you think Secretary Geithner is doing in the job that you once held?

BAKER: Well, I think he's had some rough patches. And a lot of that is due to a lack of transparency. I think it would be really healthy if there was more transparency in everything that's done.

I have a little bit of concern, quite frankly, about this public- private partnership that he's called for. At first, that looked like a great idea, where the government guarantees some private investors to take some of these toxic assets off the banks' balance sheets.

But we don't have any assurance that the banks and the new investors will come to a meeting of the minds as to what to pay for those. The investors may have a lower -- may think they're worth less than the banks, because the banks are going to have to take a loss when they sell them.

So, I think there's a lot that remains to be seen there. And the most healthy thing would be to see a lot more transparency.

Now, having said that, I think a lot of what has been done by the Fed and the Treasury was absolutely the right thing to do.

When we had a big crash in the market, a big downturn, when I was Treasury secretary back in 1987, we threw liquidity at the problem. And you have to throw liquidity at these problems. That's one thing you have to do.

And the second thing you have to do is coordinate your policies with the other major currency countries. And we're trying to do that.

And I think those things are the right thing to do.

ZAKARIA: What grade would you give him?

BAKER: Oh, I don't -- I'm not in the business of grading people.

You know, Tim Geithner got his -- his first government job was when I was Treasury secretary. He started in the Treasury, I think in 1988, just before I left the Treasury.

ZAKARIA: But way the totem pole.

BAKER: And he did...

ZAKARIA: You didn't know him.

BAKER: And he did -- no, I didn't know him. But he did a good job, I think, at the New York Fed. And I think he will do a good job at the Treasury, given time.

But he got off to a little bit of a rough start by virtue of some of the things I just mentioned, and then the tax problem that he had when he was facing confirmation.

But we ought to all support him. And I do, and hope he does a great job, because nothing is more important than getting our economy back on track.

ZAKARIA: And we will be back with former Secretary of State, James Baker.

(BEGIN VIDEO CLIP)

BAKER: You don't make peace with your friends, Fareed, as you well know. You make peace with your enemies.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: And we are back with the former secretary of state, former secretary of Treasury, former chief of staff, and a man who ran two presidential campaigns, James Baker.

One of the things that President Obama has done is to talk about a new relationship with Russia and actually move fairly aggressively on this front of trying to find some areas of cooperation.

You were secretary of state when you were actually able to get the Soviet Union to agree to sign off on the first invasion -- the first Gulf War.

BAKER: Right.

ZAKARIA: Are we returning to -- and can we, and should we return -- to a new and more cooperative relationship with Russia?

BAKER: Well, we certainly should, and I hope we are. And I was encouraged to see President Obama say that it was time to push the reset button with Russia.

You know, we've got a lot at stake. We need a good relationship with Russia. Russia needs a good relationship with us.

And the most tragic thing in the world would be, after 40 years of this Cold War that we went through and finally came out of in a peaceful way, and then close, really close cooperation or maybe even partnership with Russia, it would be a tragedy if we slid back into that kind of a Cold War existence. We don't need that. They don't need that.

We have a lot of global issues that we need Russia's cooperation on, not least of which is climate change and this economic matter that we've just been talking about and that we're now facing. But there are a lot of others.

ZAKARIA: What about Iran? President Obama has made some overtures to the Iranians, tried to talk and see if there are ways that it's possible to engage with them...

BAKER: Right.

ZAKARIA: ... find some areas of common interest.

Do you agree with that?

BAKER: Yes, I do. I do. And that was one of the recommendations in the Iraq Study Group report.

We said in that report that we ought to be talking to Iran, at least with respect to the situation in Iraq. And we said we ought to be talking to Syria across the board on all issues, with certain caveats with respect to what Syria would have to do.

But, yes. We need to talk to people. You don't make peace with your friends, Fareed, as you well know. You make peace with your enemies.

And if you know what you're doing, and you do it adeptly and right, you're not going to get in trouble by talking to people. It's not some sort of a benefit you're bestowing on them.

Now, having said that, you know, we had a policy when I was secretary of state for four years, of being willing to talk to Iran at the level of the foreign ministers. But they could never muster the domestic political support necessary to talk to us, because their whole revolution had been built upon vilifying the Great Satan -- the Great Satan, the United States of America. And they couldn't get the domestic political support necessary to talk to us.

It'll be interesting to see if they can do that now.

ZAKARIA: But, of course, by your strategy the onus was on the Iranians, and people didn't blame the United States for the...

BAKER: That's correct. ZAKARIA: ... freeze and the paralysis.

BAKER: Well, that's correct. And they can't do that any longer, because the United States under the Obama administration is saying, hey, we're willing, we're ready to talk to you.

So, that's why I think it's a healthy move.

Nothing may come of it. It may not, but it isn't going to hurt us. It may not help us, but it isn't going to hurt us.

ZAKARIA: Obama says we should draw down troops in Iraq, roughly speaking, on a two-year cycle. That sounds a lot like the plan you were suggesting.

Do you think there are any dangers here? Do you basically support it?

BAKER: Well, another thing the Iraq Study Group said, Fareed, as you know, was that we were going to have a large number of U.S. forces in Iraq for a long, long period of time. And President Obama has acknowledged that, as well.

But at some point, we must begin to responsibly draw down. And that's what he's said he's going to do. He's also followed a lot of the other recommendations that were in that Iraq Study Group report. So, I think that he's approaching it in the right way.

What's going to be really interesting to see is to see the degree to which we can draw down without creating a situation on the ground that gives rise to a resumption of violence and civil strife in Iraq. I'm hopeful that we can do that, but I think that remains to be seen.

ZAKARIA: A lot of the things you've been saying, Mr. Secretary, it sounds like you welcome the changes President Obama has made. These were changes, of course, from the Bush administration, from the administration of George W. Bush. This is a guy who, I think it's fair to say, you helped centrally get into the White House with the election of 2000.

Do you feel as though the administration of George Bush was a failure in diplomatic terms?

BAKER: No, I certainly do not.

I think a lot depends, of course, upon how Iraq will finally turn out. If Iraq turns out to be a functioning state, as opposed to a failed state, in the heart of the Middle East, that has embraced democracy -- not necessarily a Jeffersonian democracy in the way we think of it -- but a functioning and a solid, stable state in the heart of the Middle East, I think that George W. Bush will be seen to have been a very, very successful president.

ZAKARIA: Even...

BAKER: On the other hand... ZAKARIA: ... despite the price, despite the cost?

BAKER: I think so, yes. But, you know, that's a different question.

The question of whether Iraq was -- we're talking now about whether Iraq is a success. And what I'm saying is, I think the jury is still out on that.

And if Iraq turns out to be a functioning state, a democracy in the heart of the Middle East, at peace with its neighbors and not brutalizing its own people, then I think it will have been a success.

The other question is, were we justified in going in in the first instance? And in my view, the answer to that is clearly "yes."

Why do I say that? I say that because, even though it was wrong, there was intelligence from our highest intelligence agencies that Saddam had acquired weapons of mass destruction. He had thumbed his nose at 12 additional U.S. Security Council resolutions in addition to the ones we put on him at the end of the first Gulf War.

So, I think going in in the first instance was clearly justified. I think, whether or not it will be seen to be a success depends upon events still to happen in the future.

ZAKARIA: But look. On Russia, on Iran, I think on China, if I've seen some of your comments -- on all kinds of issues, you seem to be welcoming the Obama administration's shift from the Bush administration.

BAKER: I think I told you at the beginning of this program, I welcome the realism and the pragmatism that I see in the foreign policy of this administration.

Now, that's not to say there wasn't some realism and pragmatism in the foreign policy of the Bush administration, because there was. And there are many things about the Bush administration that I greatly admire, including most of the things on the domestic side, with respect to which I grave differences with the Obama administration.

But I happen to be one who believes that principles and values are rightly central to America's foreign policy, but they cannot be the only thing. The promotion of democracy and free markets is very rightly central to our foreign policy, but that can't be the only thing.

We've got to deal with the world as it really is, Fareed. And sometimes -- that means that sometimes America is going to have to deal with regimes that are less than free market democracies. And sometimes we're going to have to be willing to talk to our enemies, and things like that.

I mean, that's just the way I believe you have to practice foreign policy to get results. And after all, the bottom line is getting results. ZAKARIA: So, no bias or remorse over your role in the 2000 elections in Florida.

BAKER: Absolutely not. We're far better off to have had George W. Bush as president than the alternative.

ZAKARIA: And we will be back with former Secretary of State James Baker.

(BEGIN VIDEO CLIP)

BAKER: Can she maintain a seamless relationship with her president?

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(COMMERCIAL BREAK)

ZAKARIA: And we are back with James Baker.

Let me ask you a tactical issue as secretary of state. One of the things that Colin Powell often talked about was that he didn't travel as much as he felt he should have, because it meant he was going to lose political battles to Donald Rumsfeld and Secretary (sic) Cheney back at home.

Hillary Clinton is actually traveling a lot. Now, you were able to travel a lot, but that's because you knew that the guy in the White House was your best friend, and the man who you had run a presidential campaign for.

Is Hillary Clinton doing the right thing? Or should she be spending a little bit more time in Washington?

BAKER: I don't think that that's an either/or situation, Fareed. I think she's doing the right thing.

The real key is, can she maintain a seamless relationship with her president?

I think it was your colleague, Tom Friedman, who wrote one time that a foreign leader can detect daylight between a president and his secretary of state from 1,000 miles away. So, you need to be seamless with your president.

And everybody wants a piece of the foreign policy turf in Washington, D.C. So, you need -- to be a successful secretary of state, you've got to have a president who will protect you and defend you and support you.

And if she maintains a seamless relationship with him, she will be successful. If she doesn't, she may not be.

ZAKARIA: But can she? She was his principal political...

BAKER: It's not -- again, it's not... ZAKARIA: She was his principal political rival.

BAKER: Yes, she can. Of course she can. Yes, because you can get past that.

And it's not a question really of whether she travels or doesn't travel. It's a question of whether she is on exactly the same page and the same wavelength as her president.

ZAKARIA: So far, what do you think on that dimension?

BAKER: I think she is. Well, I think on that dimension she is, as best I can tell. I really do.

I think she has great potential as a secretary of state. She's obviously very bright, and she's interested in the job. She knows a lot of the foreign leaders.

And you pointed out that she was his number one political rival, and that's true. But those things can be overcome.

And if she didn't intend to overcome that, then she probably wouldn't have taken the job, because you can't succeed if you're not on the same wavelength with your president.

ZAKARIA: One of the things that Secretary Clinton is pushing is the Israeli-Palestinian peace process. She's appointed George Mitchell.

Meanwhile, you have elections in Israel. Prime Minister Netanyahu has come into office.

General Petraeus recently said that he worried about an Israeli military strike on Iran.

Do you think that's likely? And what do you think the effect of that would be?

BAKER: I'm not enough of a military man to know whether it's likely, or to assess what the effect would be.

I noted with interest that the George W. Bush administration, in the last months of that presidency, refused Israel's request for bunker-buster bombs and the deconfliction codes -- the codes necessary, so that if Israeli airplanes are launched, they won't conflict with American aircraft in the region -- and the right to -- I think they asked for the right to overfly Iraq.

Now, that's something that we denied Israel back in the first Gulf War, as well. They asked for deconfliction codes. The second Bush administration did that.

My sense would be that the foreign policy interests there of the United States and Israel, while they're quite similar, are not exactly the same, and that there could be some very, very deleterious effects that would come from an Israeli effort to take out Iran's nuclear capability.

So, I can't sit here and predict for you whether the Obama administration would say, OK, here are the bunker-busting bombs, and here are the deconfliction codes. But two prior administrations, one of which was seen to be extraordinarily favorably disposed toward anything Israel wanted, declined to do that.

So, who's to say? I don't know.

The other question -- and I'm not a military man -- is whether the Israelis really have the capability to get the job done, or whether all they would do is aggravate the situation. Once you attack a country, the country tends to coalesce behind it.

And I don't know whether Israel has the technical capability to do that or not. That would have to be answered by some military people.

ZAKARIA: Israel's new foreign minister, Avigdor Lieberman, says all previous deals with the Palestinians are off. It sounds like he really is pretty skeptical of any kind of real progress toward a Palestinian state.

How should we react? How should the United States react?

BAKER: Well, I think we ought to react by saying that we still support the two-state solution, that several American administrations -- well, at least the last American administration supported -- and that this current American administration has expressed support for. We support the two-state solution.

But most of all, we ought not to be caught up, we ought not react to every statement that comes out of any country, whether it's Israel or any other country.

And we ought to realize that the guy who's going to call the shots is not the new foreign minister of Israel, it's the prime minister of Israel, whose name is Bibi Netanyahu, and who is, in my view, a lot more pragmatic than he's given credit for.

And I have said before, years ago, that I always -- when Bibi was the prime minister before -- that I felt like he wanted to be the prime minister who would finally bring peace to his people.

I still feel that way. I think he's more pragmatic than he's given credit for.

And I will predict for you that there's a good chance that he might be able to make a deal with Syria, a peace deal with Syria, that Israel would accept, where the Golan is returned, Syria has more normal relations with the United States, and she enters into a normalized relationship with Israel. And it would be a complete, absolute peace and a secure peace for the state of Israel.

Now, we'll see if that happens. But, of course, a Syrian deal is a heck of a lot easier to come by than a Palestinian deal. It doesn't have all of the difficult issues involved with it like Jerusalem and the right of return, and things like that.

So, I would hope -- and I'm cautiously hopeful -- that maybe as his prime ministership progresses, that he will take a hard look at concluding a deal with Syria.

ZAKARIA: Secretary Baker, a pleasure to have you on.

BAKER: Thank you, Fareed.

ZAKARIA: And we will be right back.

(BEGIN VIDEO CLIP)

MARTIN WOLF: The biggest single lesson of this financial crisis is, the U.S. is central -- for good and ill.

(END VIDEO CLIP)

(COMMERCIAL CLIP)

ZAKARIA: James Baker had some fascinating insights into all that has developed during Obama's overseas adventures. Baker is a seasoned diplomat, so his insights are always carefully considered.

So, now I want to talk to three people who are the opposite of diplomats. They're journalists, intellectuals, and so, seldom hesitate to say exactly what they think.

Martin Wolf is now a commander of the British Empire, I discovered, an honor bestowed on him by Queen Elizabeth II. He is also the chief economics commentator for the "Financial Times."

Moises Naim is not yet a nation unto himself, so he's not a member of the G-20, but he is a member of the G-50. In fact, he's chairman of the board of this group of top business leaders from the Americas. His day job is editor-in-chief of "Foreign Policy" magazine.

Nicholas Kristof is a columnist for the "New York Times." By his own count, he has lived on four continents, reported from all six continents -- I say all six continents, except Antarctica -- and traveled to all 50 states, and more than 140 countries, which is more than I can say.

Welcome.

Martin Wolf, the G-20 has come and gone, and the world economic crisis seems no better. The stock markets are doing better than when we last talked.

Do you think you were a little too pessimistic? MARTIN WOLF, COLUMNIST, "FINANCIAL TIMES": Well, one thing I am absolutely convinced of from my lifetime of observation, is that one really shouldn't take too seriously what the stock market does in the short run. Once one bets on that, I have no idea where you end up.

But there are, I think, some reasons, despite the long tide of very, very bad news, and the forecasts are getting worse and worse. You can see the most recent forecasts from the OECD suggest that the advanced countries' economies will shrink by 4.3 percent this year.

The really important point is their continued downgrade. So, it's very, very bad. And we're going to have a very deep recession this year, the worst since the '30s.

But the reason for optimism? Well, the truth is, at home, countries are doing quite a lot. Central banks above all -- I think they're the real action -- are pouring out money. We've never seen monetary policy as aggressive as today in the whole history of the world. They're printing money at an extraordinary scale.

So, I'm not surprised that stock markets are beginning to show a recovery for that reason alone. So, it is possible to imagine that we may get a short-term bounce in the economy next year.

ZAKARIA: Nick?

NICHOLAS KRISTOF, COLUMNIST, "NEW YORK TIMES": I mean, my sense is that, one of the great weaknesses, both in the United States and in Europe, has been the reluctance to deal with this problem of bad assets. And really, the great lesson from Japan, for example, was that, while stimulus packages help, regulations help, unless you deal with bad assets, you're not going to go very far in reviving economic activity.

But frankly, one of the other lessons is that we really don't know very much what we're doing when we mess around with a large economy.

In the case of the Asian economic crisis, I think one of the things that I learned was that listening to very smart people help you a little bit compared to listening to not very smart people, but only marginally. Things were so complex that even absolutely brilliant policymakers ended up making catastrophic mistakes.

ZAKARIA: One of the things I've been noticing, Moises, is, when you look at the real GDP numbers as opposed to just the financial markets, the stock markets, what seems to be happening is what everybody derided about a few months ago, which is some degree of decoupling.

That is, the Chinese economy does seem to be likely to grow in the range of 6 to 7 percent. The Indian economy seems to be likely to grow in the range of 5 to 6 percent. Brazil might grow 1 to 2 percent. Turkey, they say, 3 to 4 percent.

So, you are seeing a power shift and an emergence of these emerging countries. And you see that in the G-20 with Lula saying this crisis was produced by people who are white-skinned and blue- eyed, and, you know, the Chinese talking about a new reserve currency.

What do you make of this sort of uppity talk at the G-20?

MOISES NAIM, EDITOR-IN-CHIEF, "FOREIGN POLICY": I am as skeptical of that as Martin Wolf is skeptical of looking at the stock market to take the barometer of the economy.

All of these countries and their performance are going to be very sensitive to how lengthy this crisis is and how deep it is. We are just beginning. The most important things about this crisis haven't happened yet.

And these countries, and the list you mentioned, are going to be deeply hurt if this crisis continues for a year or more, and if it deepens.

ZAKARIA: What about the Germans and the French? They seem to be -- there's a lot of backtalk against the Anglo-American form of capitalism.

WOLF: It's quite interesting that they have been quite so stroppy, as it were. I'm not surprised, I mean, in the sense that -- particularly the relationship between the Americans and the Germans over stimulus packages. This goes a long, long way back.

That leaves us with a big problem, because Europe will make a relatively small contribution if Germany doesn't.

What exactly the French have been playing at is not so clear to me, because historically, they've always gone along with the stimulus idea, and they certainly need it. But it is certainly true that the dominant weight of French opinion -- I mean, 99.9 percent, more or less -- is that liberal capitalism and financial capitalism is a terrible idea foisted upon them by these awful English-speaking people.

And now at last they can say, "We told you so. You were wrong." And maybe they regard that as more important than having an effective exit from the crisis.

(LAUGHTER)

I find it quite puzzling.

The German position, however, is a longstanding, historically- rooted one. But...

ZAKARIA: It's rooted in...

WOLF: ... it has a big implication. It means that we -- you cannot expect Europe -- I think it will make a modest contribution, but it's not going to make a big contribution.

ZAKARIA: Moises, how do you think Obama has done on the foreign policy front so far, talking about resetting the relations with Russia, approaching Iran, Syria, China?

NAIM: I think he's so far, so good. It's too early to tell, and there will be crises that will test him more dramatically than until now. But I think, so far, so good. I think this trip to Europe has been a great success.

And again, we have to compare his performance to the situation he inherited. He inherited a very complicated array of very difficult, very challenging situations. And I think he is facing up to them quite well.

ZAKARIA: Nick, the one big thing he's decided is more troops to Afghanistan. You sound, from your writings, pretty skeptical of this.

KRISTOF: Yes. I must say that I'm struck when I go to Afghanistan -- and talking to the Pashtuns from the south, in particular -- that there is a real concern about having Westerners, non-Muslims in the south.

And, you know, the average Pashtun seems to have a lot of hostility and antipathy, a lot of skepticism about the Taliban. On the other hand, they have a lot of doubts about the Karzai government, about the corruption, about its inefficiency and inability to do anything.

And when you get Americans there at the grassroots, they appreciate some of the new construction being done. But when you have an accidental killing, when you have a raid on a house, then it inflames people in a way that ultimately helps the Taliban.

ZAKARIA: You know, Robert Gates, the secretary of defense, says that the Europeans are not doing enough to convince their people that they face a threat from the Afghanistan-Pakistan area, they've got to be committed to the Afghan struggle, and that what we're witnessing is the same old, you know, European problem -- they want a free ride on American security.

WOLF: Absolutely. I mean, as I said once, what's so interesting about the situation is how familiar it all is. We discuss the familiarity of the economic arguments between the Europeans, particularly Germany and the U.S. I mean, this is exactly the same thing.

I mean, the Europeans basically -- I would say, the arguable exception of the British -- think that they have a moral right to a free ride. That's the deal. The deal is, the U.S. throws its weight around. It's the superpower. The Europeans listen politely, which is, after all, a great deal, and then they say "no" in a polite way.

What will interest me -- and indeed, that's part of it. To me, Mr. Obama is a very impressive figure and fundamentally unknown. And I'd like to see how he responds when things really don't go his way, when he finds the Europeans don't cooperate, when he finds Iran doesn't cooperate, when he finds Afghanistan doesn't go the way he wants. And we didn't talk about Pakistan. How will -- is the question you want -- how will Mr. Obama's administration respond to the fact that the Europeans are not doing what he wants? And I have no idea. I hope he'll be pretty tough.

ZAKARIA: Let's talk about that.

KRISTOF: Yes. I mean, I think that is indeed the larger challenge. I mean, I think we're right to be starting a conversation with the Iranians. But I think, nonetheless, it is quite likely that Iran will push ahead with a nuclear weapons program anyway.

I think we're being much more engaged in the Middle East. But I think it's quite unlikely we're actually going to solve -- produce any kind of peace, realistic peace process there.

And you may very well have Israel launching a strike on Iranian nuclear sites.

So, for all of the quite wise steps that I think the administration has taken in foreign policy, the test, as Martin says, is going to be what happens when, despite all of that, it goes wrong?

NAIM: So, it's hard to disagree with all this.

But it is also true that the world has changed. And all of these countries in Europe, and even Russia and Iran, are different countries now.

If there is one way of describing the world today, it is weakness everywhere. Everyone is weak. Everyone feels insecure. Even China, with its growth and its achievements, feels very insecure.

WOLF: One thing we can add is, it does seem to be incredibly important when we had this earlier discussion about the crisis in the world, it does seem to me, the biggest single lesson of this financial crisis is, the U.S. is central -- for good and ill.

When you have a serious financial crisis in the U.S. -- we talked about decoupling; there is, actually, not much decoupling -- a big financial crisis in the U.S. has turned out to be a big world crisis. What better demonstration can there be of the centrality of the U.S.?

ZAKARIA: And on that note, Martin Wolf, Nick Kristof, Moises Naim, thank you very much.

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ZAKARIA: Now for our "What in the World?" feature. It's the week's biggest international outrage or amazing act of statesmanship or smarts -- anything that catches my eye.

And here's what got my attention this week. It's the single simplest and clearest proposal I have seen for understanding and fixing the financial industry. It's an idea published in the "Financial Times."

As I read it I wondered, why didn't anyone think of this earlier, or say it quite so simply?

This is the argument. There are four basic ways to hand your money over to financial institutions.

Number one, banks. You give them your money to hold on to. Your money is guaranteed, your deposits. And the bank has to hold enough capital to give you your money back, if you want to pull it out.

Two, insurance. You pay them money up front. Your money is guaranteed. So the insurer has to hold enough capital to pay, if you need to collect on your policy.

Three, gambling. You pay your bet up front. Your money is guaranteed if you win. So, the house has to hold enough capital to pay the winners when they bring the chips in.

Notice a trend here?

But then, number four is investing. Say you invest in stocks. You pay for them up front, and there are no guarantees. You can lose everything if the stock goes to zero. And so, the investment banks don't have to hold much capital.

Now, that leads us to credit default swaps. These are the risky investments that are at the heart of the financial crisis, what the author of that "F.T." piece calls the rocket fuel that turned the subprime mortgage fire into a conflagration.

And they are a part bet, part insurance policy where the investor buys insurance to cover their own losses in case of a bad bet. And this isn't some niche investment.

Consider this startling fact. The market for credit default swaps is twice as big as the entire U.S. stock market.

And the problem is that credit default swaps, CDSes, fall into none of the four categories. They are insurance policies. Payment is guaranteed, but the issuers are not required to hold cash to support them.

People have often spoken of investment banks as casinos. But that does a disservice to casinos. If you take your chips to the cashier and you've won, the casino will honor them. Not so for CDSes.

How can this be? Because in 2000, our elected officials undid regulations that would have made this black hole, this loophole, impossible.

And the simply but brilliant solution is, make credit default swaps fit one of the four categories I mentioned earlier. If financial institutions offer a guarantee, as they currently do with CDSes, they must be required to hold sufficient capital to back up these bets when the investment gamblers come to the cashier's window to ask for the money.

The man behind this great idea is Eric Dinallo, the insurance superintendent of New York State. And he's the guy who wrote the piece in the "F.T." If you want to read it, go to our Web site, cnn.com/gps. We have a link to it.

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ZAKARIA: Now, the question of the week.

Last week I asked you, what do you think is the most important thing for the G-20 nations to hammer out at the summit?

We offered three answers. The clear winner was reforming the financial institutions in each leader's own country, and creating a mechanism for doing so around the globe. I have to say, this is more the French-German proposal than the British and American one.

This week I have a simple request. Give President Obama a grade for how he handled the G-20 summit and his other travels -- old- fashioned report card grade, A, B, C.

Keep in mind that this was probably the most important meeting he's had, the G-21, and it's a chance to really move forward on the economic crisis that threatens the world. Let me know what you think.

In addition to the question of the week, I want to put all of your great minds to a different challenge. It's called "Fareed's Challenge," and it is a weekly quiz on our Web site, cnn.com/gps. Ten questions, new ones every Sunday, that can only be answered by sharp- minded GPS viewers like you.

As always, I'd like to recommend a book, "The Age of the Unthinkable." It's by Joshua Cooper Ramo, who argues that innovation is the key to success, whether in business or government.

To make his point, Ramo lumps together unlikely bedfellows, Google and Hezbollah. What can they possibly have in common? Read it.

And also read Ramo's intriguing argument about how we really need to reconceptualize international politics and international economics.

And don't forget to check out our Web site, cnn.com/gps, for extra Web-only interviews, highlights from the program, our weekly podcast and our current affairs quiz. And you can also e-mail me at fareedzakariagps@cnn.com.